Transcript Bright Trading Retreat

Trading strategies that I use & the trading rules that
govern them
I) Market neutral trading in sectors and
market making in “children” stocks
 Currently my most productive strategy
 I have a list of stocks regularly trade and am very familiar with
 Follow the sector ETF, S & P 500, 10 year bonds
 Trade these “children” securities in each sector with either
long or short bias dictated by market and sector trends
 Hedge positions 50% or more (this changes with my opinion
of the direction of the market, and other securities within
that sector)
II) Day Trading
 Works best in high volume high volatility like 2008
 I go “Dime Hunting”
 Watch “children” & stocks on the move and in the news
(Banks, Fannie Mae, Tyco, Enron, Internet Bubble)
 Ratio pair day trading
 Trade highest correlated pairs with most predictable ranges
on range bound days using 5 minute – 60 minute e-Signal
charts
 Tape Reading
 Watch for internalization, sub penny activity, and black pool
trades on the tape for “tells” for short term trades.
III) Ratio Based Pair Trading
 Seek highly correlated pairs in e-Signal using day charts.
Swing trade positions.
 Rob Friesen and PairTrader.com
 Darren’s ratio
 Accounts for 10 to 20% of my profits
 Favorite trade set ups
 Range bound pairs at range high or low with not trend and
regular price action
 Trending pairs: Trade from a position of strength, add to
winners, exit losers. (also can be used when trend trading
futures, ETF’s, currencies, and other securities)
 Range bound pair with brief trend: Wait for move to end then
enter the trade using recent high or low as a stop loss point.
IV) Special Edge Trading
Then and Now
 Then
 Fractions
 ECN and Exchange arb. Early 2000’s
 NYSE price improvement strategies early/mid 2000’s
 Open Book trading (leaning on large bids and offers for
short term day trading)
 Stocks lag futures (follow moves in e-minis buying and
selling “children” stocks)
 Now
 Tape based day trading

Look for these “tells”: heavy sub penny internalization action
and dark pool action selling or buying
 OO’s & MOC’s (see Don)
 Stat. arb. charting and programming availability
 Back test programs
 Automation
 Proprietary edges
Trading Rules and Principles
that govern my trades and
trading strategies
1)The only constant thing in
trading is change.
 Either adapt to it
 Overcome it
 Or get run over by it
“The dogs bark and the caravan moves on” Ancient
Proverb
2) Be the Casino
 Approach trading like a casino approaches gambling
 Keep the odds in your favor
 Coin flip example
 Play the odds
3) Look for the highest
probability of profit over the
highest profit potential
 You win more baseball games with singles than home
runs.
4)Don’t be a one trick pony
 Always stay on the lookout for new ideas and strategies
5. Don’t lose money
 When a strategy begins to lose money I quickly
decrease my trading size.
 The strategy is now dormant.
 When a strategy is dormant don’t worry about how
much you are making. The goal is to make it profitable
again at which point increase your size.
6) Increase your trading size when
making money.
 When your strategy is consistent start to increase your
position size and focus more time finding ways to
expand the working strategy.
7) Focus on what you are good at
 Howard Gardner’s multiple intelligences.
 Would you ask Einstein to compose a symphony or
Mozart to teach the theory of relativity.
8) When in doubt get out!
 Doubt most likely means things are not going as
planned or things have changed.
 Doubt will cloud your decision making
 You can always get back in when things line up in your
favor.
9)My Trend Trading Rule
 When trading the trend play with your offense not
your defense
 Add to winning positions and cut losers
 Don’t pick tops
Admit mistakes quickly and often
 Don’t be stubborn
 Being wrong is part of a winning strategy
 Have you reached your wrong quota this month?
11) Always plan for the worse case
scenario.
This applies to trading and managing your trading
capital.
12)Don’t step in front of a speeding
train.
 Wait until the train stops and turns around before you
climb on board.
13) Keep it simple
 The Harvard MBA and the master programmer that
had the unfortunate job of trading.
14)Separate your emotions from
your trading